An LLC is one of the most popular business structures because it offers liability protection and tax benefits. And for solopreneurs, small business owners, and the growing number of freelancers and online business ventures, an LLC is an attractive business model.
But what happens if you want to do business in another state or even country? Do you need to create a foreign LLC? The answer is maybe. It depends on your business activities.
This article will discuss what a foreign LLC is and when you should consider creating one. We’ll also compare a domestic LLC vs. a foreign LLC so you can decide which business structure is right for your business.
What Is a Domestic LLC?
LLCs are relatively new; they were first introduced in Wyoming in 1977. They offer many of the same benefits as corporations, including limited liability protection and flexibility in how the business is structured and taxed.
However, LLCs also have some distinct advantages. For example, LLCs are not subject to the same strict rules and regulations as corporations, making them less formal and easier to manage.
In addition, the profits of an LLC are not subject to double taxation like those of a corporation. As a result, LLCs have become the most popular choice for small businesses and startups.
A domestic LLC is an LLC that a business owner forms in the state they do business (or their state or residence). For example, if you live in California and want to start an LLC, you would file the necessary paperwork with the California Secretary of State to form a domestic LLC.
The main advantage of forming a domestic LLC is that it’s relatively simple and straightforward. You only need to comply with the laws of your state, which are typically less complex than the laws of other states (especially if you are unfamiliar with them).
Another advantage of a domestic LLC is that it can be less expensive to form and maintain than a foreign LLC. This is because you only need to file paperwork with one state government, rather than multiple governments.
What Is a Foreign LLC?
A foreign LLC is an LLC that is formed in a state other than the one in which it does business. For example, if you live in California but want to start an LLC that does business in New York, you would file the necessary paperwork with the New York Secretary of State to form a foreign LLC.
And if you live in California and own a California LLC and then move to New York, you’ll need to file for a foreign LLC in New York.
The main advantage of forming a foreign LLC is that it allows you to do business in multiple states without having to form separate LLCs in each state.
This can be especially beneficial if you have customers or clients in multiple states or if you plan to expand your business into new states in the future.
Another advantage of a foreign LLC is that it can give you a broader reach and allow you to tap into new markets.
A foreign LLC can also be advantageous if you are doing business in a state with favorable tax laws or if you want to take advantage of other benefits that the state offers.
The Basics of Domestic LLC vs. Foreign LLC
The main difference between a domestic LLC and a foreign LLC is the state in which they are formed.
A domestic LLC is an LLC formed in the same state where it does business, while a foreign LLC is formed in a state other than the one in which it does business.
Let’s take a look at some of their key differences.
1. Foreign and domestic LLCs operate in the same way and offer the same benefits
In the case of both foreign and domestic LLCs, the business owner(s) will enjoy limited liability protection. This means that they will not be held personally responsible for the debts and liabilities of the business.
Both LLCs also offer flexibility in how the business is structured and taxed. For example, an LLC can choose to be taxed as a sole proprietorship, partnership, or S-corporation.
2. Online business owners must file in the state they reside in
Solopreneurs and single-member LLCs will be taxed as if their businesses are sole proprietorships by default. This means that you’ll file your taxes with your personal tax return.
What this means is that if you register an LLC in South Dakota, Nevada, Wyoming, Delaware, or another state with lenient LLC laws but you live in California, you’ll still need to file and pay taxes in California.
The only way around this is to physically move your business operations (i.e., your office, inventory, etc.) to the state where your LLC is registered. And if you run an online business (e.g., an agency, dropshipping business, etc.), this likely isn’t feasible.
So, if you’re an online business owner, you’ll need to file in the state you reside in regardless of where your LLC is registered.
However, if you have a multi-member LLC, you can elect to be taxed as an S-corporation. This means that your LLC will file a corporate tax return (in addition to each member filing a personal tax return).
While this might sound like a hassle, it can actually save you money on taxes because S-corporations are only taxed once (at the corporate level) as opposed to twice (once at the corporate level and once at the personal level).
And, if you have a multi-member LLC that is taxed as an S-corporation, you can file in any state regardless of where your LLC is registered or where its members reside.
3. You’ll need to file additional paperwork and pay fees to register your LLC in a new state
If you want to do business in multiple states with your LLC, you’ll need to register it as a foreign LLC in each state where you plan to do business.
For example, let’s say that your LLC is registered in Delaware but you want to do business in New York. In this case, you’ll need to file additional paperwork and pay a fee to register your LLC as a foreign LLC in New York.
The same is true if you have a domestic LLC and want to physically expand your business into new states. You’ll need to register your LLC as a foreign LLC in each state where you plan to do business.
The good news is that, once you’ve registered your LLC as a foreign LLC in one state, the process for registering it in additional states is usually much easier.
And, if you use an LLC formation service like Bizee or LegalZoom, they can often help you with this process.
3 Tricks for Filing Your Foreign or Domestic LLC
Now that you know the basics of LLC formation, let’s take a look at three tricks that will make the process even easier.
1. File your domestic LLC in a tax-lenient state, then file as a foreign LLC in your home state
A few states have very high taxes for LLCs, so it’s best to avoid these states if possible. Instead, file your domestic LLC in a state with lower taxes, like Wyoming or South Dakota. Then, you can file as a foreign LLC in your home state and only pay the annual report fee.
If you live in California, for example, taxes are extremely expensive and you will need to pay an $800 annual fee to the California Franchise Tax Board. If you register your company as a foreign LLC, you’ll still need to pay that fee, but you won’t be bogged down by it should you decide to move your company to another state.
While it may seem like a hassle to file in multiple states, this method can actually save you a lot of money in the long run by allowing you to dissolve the foreign LLC as soon as you decide to move, rather than setting up a new company in the new state.
2. Use an online service to file your LLC
There are a number of online business formation services that can help you file your LLC quickly and easily. We recommend using one of these services if you’re not comfortable filing on your own or if you want someone else to handle the paperwork for you.
Online business formation services typically charge around $100 to $800 to file your LLC, depending on the state in which you’re forming.
They’ll also usually include a number of other features and services, like registered agent service, business banking, and compliance updates.
Plus, they’ll do all the work for you!
3. A sole proprietorship is much easier, but it offers less protection
If you’re the only owner of your business, you can choose to operate as a sole proprietor rather than forming an LLC. This is much simpler and requires far less paperwork.
However, it also offers practically no liability protection since you and your business are considered one and the same.
If you’re comfortable assuming all the risk yourself, then a sole proprietorship may be the way to go. But if you want to protect your personal assets in case of litigation or debt, an LLC is the better choice.
What to Do Next
Once you file your LLC, you’ll need to consider a few other things, like opening a business bank account and getting business insurance.
You’ll also need to register your LLC with the IRS to obtain an Employer Identification Number (EIN). This number is used to identify your business for tax purposes.
To learn more about starting a business in-depth, check out our blog post on how to start a business, where we cover everything from business entity selection to getting your first customers.
And if you plan to open an online store, be sure to read our article on how to start an online store to ensure you set it up correctly.